Customer Financing

3 Months Ended

Jul. 31, 2021

As a convenience to our customers, we offer several different financing alternatives, including a third party program and a Patterson-sponsored program. For the third party program, we act as a facilitator between the customer and the third party financing entity with no on-going involvement in the financing transaction. Under the Patterson-sponsored program, equipment purchased by creditworthy customers may be financed up to a maximum of $1,000. We generally sell our customers’ financing contracts to outside financial institutions in the normal course of our business. These financing arrangements are accounted for as a sale of assets under the provisions of ASC 860, Transfers and Servicing. We currently have two arrangements under which we sell these contracts. We use a monthly unit of account for these financing contracts.

First, we operate under an agreement to sell a portion of our equipment finance contracts to commercial paper conduits with MUFG serving as the agent. We utilize PDC Funding to fulfill a requirement of participating in the commercial paper conduit. We receive the proceeds of the contracts upon sale to MUFG. At least 15.0% of the proceeds are held by the conduit as security against eventual performance of the portfolio. This percentage can be greater and is based upon certain ratios defined in the agreement with MUFG. The capacity under the agreement with MUFG at July 31, 2021 was $525,000.

Second, we maintain an agreement with Fifth Third Bank ("Fifth Third") whereby Fifth Third purchases customers’ financing contracts. PDC Funding II sells its financing contracts to Fifth Third. We receive the proceeds of the contracts upon sale to Fifth Third. At least 15.0% of the proceeds are held by the conduit as security against eventual performance of the portfolio. This percentage can be greater and is based upon certain ratios defined in the agreement with Fifth Third. The capacity under the agreement with Fifth Third at July 31, 2021 was $100,000.

We service the financing contracts under both arrangements, for which we are paid a servicing fee. The servicing fees we receive are considered adequate compensation for services rendered. Accordingly, no servicing asset or liability has been recorded.

The portion of the purchase price for the receivables held by the conduits is deemed a DPP receivable, which is paid to the applicable special purpose entity as payments on the customers’ financing contracts are collected by Patterson from customers. The difference between the carrying amount of the receivables sold under these programs and the sum of the cash and fair value of the DPP receivable received at time of transfer is recognized as a gain on sale of the related receivables and recorded in net sales in the condensed consolidated statements of operations and other comprehensive income. Expenses incurred related to customer financing activities are recorded in operating expenses in our condensed consolidated statements of operations and other comprehensive income.

During the three months ended July 31, 2021 and July 25, 2020, we sold $73,043 and $50,070 of contracts under these arrangements, respectively. In net sales in the condensed consolidated statements of operations and other comprehensive income, we recorded a gain of $73 and a loss of $342 during the three months ended July 31, 2021 and July 25, 2020, respectively, related to these contracts sold. Cash collections on financed receivables sold were $108,111 and $71,844 during the three months ended July 31, 2021 and July 25, 2020, respectively.

Included in cash and cash equivalents in the condensed consolidated balance sheets are $37,858 and $36,771 as of July 31, 2021 and April 24, 2021, respectively, which represent cash collected from previously sold customer

financing contracts that have not yet been settled. Included in current receivables in the condensed consolidated balance sheets are $19,070 and $50,638 as of July 31, 2021 and April 24, 2021, respectively, of finance contracts we have not yet sold. A total of $618,332 of finance contracts receivable sold under the arrangements was outstanding at July 31, 2021. Since the internal financing program began in 1994, bad debt write-offs have amounted to less than 1% of the loans originated.

The following rollforward summarizes the activity related to the DPP receivable:


	Three Months Ended
		July 31, 2021		July 25, 2020
Beginning DPP receivable balance		$	227,967	$	228,019
Non-cash additions to DPP receivable		19,110		16,511
Cash (collections) payments on DPP receivable		(51,142)		7,648
Ending DPP receivable balance		$	195,935	$	252,178

The arrangements require us to maintain a minimum current ratio and maximum leverage ratio. We were in compliance with those covenants at July 31, 2021.